Presentation on theme: "PRICE: ARRIVING AT THE FINAL PRICE C H A P T E R F I F T E E N"— Presentation transcript:
1 PRICE: ARRIVING AT THE FINAL PRICE C H A P T E R F I F T E E N Irwin/McGraw-Hill
2 AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: Understand how to establish the initial “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches.Identify the major factors considered in deriving a final list or quoted price from the approximate price level.(continued)
3 AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: Describe adjustments made to the approximate price level based on geography, discounts and allowances.Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price.Describe the principal laws and regulations affecting pricing practices.
4 PP15-1 Steps in Setting Price Select anapproximateprice level-Demand-orientedapproaches-Cost-Oriented-Profit-oriented-Competition-Identifypricingconstraintsand objectivesEstimatedemandandrevenueSet list orquoted price-One price orflexible prices-Company,customer, andcompetitiveeffects-Incrementalcosts andrevenuesMake specialadjustments tolist or quotedprice-Discounts-Allowances-GeographicaladjustmentsEstimatecost, volume,and profitrelationships
5 PP15-AA The Gillette Mach 3 Shaving System Gillette’s world leading market share:71% in North American and Europe91% in Latin American69% in IndiaNew Mach 3 shaving system is priced 35% above theirhighly successful Sensor Excel model, as marketingresearch indicated that men would be willing to pay45% more than they were paying for Sensor given theadditional benefits of the Mach 3.
11 PP15–A Mark-ups for a manufacturer, wholesaler and retailer on PP15–A Mark-ups for a manufacturer, wholesaler and retailer on a home appliance sold to the consumer for $100$1008060402010PriceManufacturerWholesalerRetailerManufacturer selling price = $ 59.93Manufacturer mark-up = $ 7.76 = 15%Manufacturer cost = $ 51.77Wholesaler mark-up = $ = 20%Wholesaler selling price = $ 71.43cost = $ 71.43Retailer mark-up=$ = 40%selling price = $ 100Wholesaler cost = $ 59.53
12 Average cost of Least-Expensive Models Cellular Phone in Service PP15–B Cellular phone unit sales, average cost and average price: evidence of the experience effectAs Cellular Phone Volume Increases . . .The Average Cost to Produce Decreases . . .3,500’83’84’85’86’87’88’89’90’91’92’93’94’952,5002,0001,5001,000500Average cost of Least-Expensive Models’83’84’85’86’87’88’89’90’91’92’93’94’953,0002,5002,0001,5001,000500Cellular Phone in ServiceFollowed by Price DecreasesDollarsDollars’83’84’85’86’87’88’89’90’91’92’93’94’953,0002,5002,0001,5001,000500Average Price of Least-Expensive ModelsDollars
14 PP15-4 Results of computer spreadsheet simulation to select price PP15-4 Results of computer spreadsheet simulation to select price to achieve a target return on investmentAssumptions SIMULATIONor Results Financial Element Year A B C DAssumptions Price per unit (P) $ $54 $54 $58 $58Units Sold (Q) , , , ,000Change in Unit Variable Cost (UVC) % % % % %Unit variable cost $ $ $ $ $26.40Total expenses $8, Same Same Same SameOwner’s salary $18, Same Same Same SameInvestment $20, Same Same Same SameState and federal taxes % Same Same Same SameSpreadsheet Net Sales (P x Q) $50, $ 64, $59, $63, $58,000simulation Less: COGS , , , , ,400results (Q x UVC)Gross Margin $28, $ 35, , $ 34, $31,600Less: total expenses , , , , ,000Less: owner’s salary , , , , ,000Net profit before taxes $ 2, $ 9, $6, $8, $5,600Less: taxes , , , , ,800Net profit after taxes $ 1, $ 4, , , ,800Investment $20, $20, $ 20, $20, $20,000Return on Investment % % % % %
16 PP15-GG Concept Check 1. What is standard markup pricing? 2. What profit-based pricing approachshould a manager use if he or she wants toreflect the percentage of the firm’sresources used in obtaining the profit?3. What is the purpose of loss-leader pricingwhen used by a retail firm?
17 PP15-HH One-Price versus Flexible-price Policies One-Price Policy: setting the same price for similar customers who buy the same product and quantities under the same circumstances. An example would be Saturn’s “no hassle-one price” policy for new and used cars.Flexible-Price Policy: offering the same product and quantities to similar customers but at different prices. Car dealers have traditionally (and still do) used flexible pricing in getting to the final sale price.
18 PP15-5 The Power of Marginal Analysis in real-world decisions Suppose the owner of a picture framing store is considering buying a series ofmagazine ads to reach her up-scale market. The cost of the ads is $1,000, the averageprice of a framed picture is $50, and the unit variable cost(materials plus labor) is $30. This is a direct application of marginal analysis that an astute manager uses toestimate the incremental revenue or incremental number of units that must beobtained to at least cover the incremental cost. In this example, the number of extrapicture frames that must be sold is obtained as follows:Incremental number of frames ==Extra fixed costPrice - Unit variable cost$1,000 of advertising$50 - $3050 frames=
19 PP15-6 Three special adjustments to list or quoted price GeographicaladjustmentsFOB origin pricingDelivered pricingSingle zone pricingMultiple zone pricingFOB with freight-allowed pricingBasing-point pricingDiscountsQuantitycumulativenon-cumulativeTrade (functional)CashAllowancesTrade-inPromotional
20 PP15–7 The Structure of Trade Discounts Manufacturer’s suggested list Price$100.00Retailer’s cost or wholesaler sales price$ 70.00Wholesaler cost or jobber sales price$ 63.00Jobber cost or manufacturer’s sale price$ 59.15(minus) ($ 30.00)(minus) ($ 7.00)(minus) ($ 3.15)Retail discount: 30% of manufacturer’s suggested priceWholesaler’s discount: 10% of wholesaler’s sales priceJobber discount: 5% of jobber sales price
21 PP15–C Example of basing-point pricing Seattle customer pays $130$30 freight$10 freightChicago customerpays $110Los Angelescustomerpays $120$20 freightSt. Louis plant is“basing-point”$100 base price
23 PP15-II Concept Check 1. Why would a seller choose a flexible-price policy over a one-price policy?2. If a firm wished to encourage repeatpurchases by a buyer throughout theyear, would a cumulative ornon-cumulative quantity discount be abetter strategy.3. What pricing practices are covered bySherman Act?